I want to present a perhaps controversial thesis that Brian Cowen and Brian Lenihan (Taoiseach and Finance Minister, respectively) are not only basically honest but perhaps also the two most capable men in Irish politics (there is not much competition, and there are few high profile women); that they are neither corrupt nor hell bent on political suicide; and that they genuinely believe they are doing their best for their country at very considerable personal cost in terms of popularity and political survival chances.

One is an accountant, and the other a lawyer. Both are experts in how those professions construct the world around them; particularly the legal and accounting fictions and assumptions that are required to construct legal arguments and balance sheets. Both are blessed with considerable social and emotional intelligence which allow them to relate well to most people, and neither are impervious to the hugely conflicting views and emotions which surround them. I would imagine they have faced their current political dilemmas with considerable personal anguish.

As I have argued in several posts now, they are also in the process of making perhaps the single most serious mistake in Ireland's political history as an independent state. I refer, of course, to the Nama proposal to hugely overpay banks for distressed assets as a way of avoiding either nationalising them or allowing the banks to go bankrupt and then reconstituting them as "good banks".

So how can both propositions be true? How can they be both able and stupid? The answer lies, I believe in the power of ideology in mediating how people see reality; how they come to understand the choices open to them; and how they evaluate the consequences of those choices.

So what are the key parameters of the ideology which has guided their world view and choices to date? I am not an expert in the axioms of neo-liberal economics, so here I need to tap into ET's considerable reservoirs of talent in ideological demystification and narrative de-construction. Please follow me below the fold if you think you can make a contribution to understanding this phenomenon...

The neo-liberal axioms which have guided their actions, can, I think be summarised as follows:

Despite occasional dysfunctions, markets remain the best and most efficient ways of allocating resources and maximising productive efficiency in a modern economy.

It is the role of Governments to regulate those markets as lightly as possible so as not to be at a competitive disadvantage to other, less regulated markets.

The last thing any Government wants to do is get involved in the messy business of calling in loans, foreclosing on people's houses, and making employees redundant.

If there are residual social problems not addressed by market mechanisms, these can legitimately be addressed by Governments, but ideally in ways which "distort" market mechanisms as little as possible.

In Ireland's case we are critically dependent on international financial markets despite having, until very recently, one of the lowest debt/GDP ratios of any advanced western economy.

This is because we are a small, very open, peripheral economy which has grown rapidly precisely when and because we offered lower tax rates and regulatory hurdles than competing jurisdictions.

The key requirement now, therefore, is to keep foreign investors and bond markets sweet, by leveraging our ability as a state and as a member of the EU/Eurozone to borrow in bulk at a large discount to what private investors could do.

We are thus, to some extent, externalising the consequences of the bankers/developers profligacy onto the Eurozone/ECB/EU who are effectively guaranteeing our currency and our bonds and onto the collective bargaining power of Irish taxpayers as represented by the state.

Bankers/developers behaved badly, to be sure, and we will have to fix the structural incentives they sought to maximise sometime; but the overweening issue now is that we must retain/regain the trust of precisely the sort of predatory investors/financiers who got us into trouble the first time around. This is the real politique of the world we live in.

All going well, Irish property markets and the economy generally will recover, and then the taxpayer, too, could be "quids in". Whether we like it or not, we are all investors/speculators now. This is the real world, and we may as well get used to it and be part of the action...

Is this an adequate description of the neo-liberal political world-view and just where does it fly in the face reality?

We [Irish] are thus, to some extent, externalising the consequences of the bankers/developers profligacy onto the Eurozone/ECB/EU who are effectively guaranteeing our currency and our bonds and onto the collective bargaining power of Irish taxpayers as represented by the state.

This is the rub. As I suggested in your previous diary, it is likely that a large fraction of the debt owed by Irish banks and which the Irish government has guaranteed is owed to creditors in the Eurozone. As part of the same currency area it would be very difficult for Ireland to do a good bank/bad bank situation in which foreign creditors are hung out to dry without suffering the consequences.

The question is, who benefits. Is it a certain Eurozone-wide financial elite that benefits to the detriment of the populations in all the countries?

Why would an Irish Government allowing an Irish bank to go bust to the detriment of foreign (and local) but Eurozone investors be different from the US allowing innumerable banks go bust? AIB/BofI may be systemic to the Irish economy but they are but small/medium sized banks in a Eurozone context.

1. People have rational preferences among outcomes that can be identified and associated with a value.
2. Individuals maximize utility and firms maximize profits.
3. People act independently on the basis of full and relevant information.

The items in your list are deductions, inferences, conclusions, and etc. stemming from these axioms.

All of these are demonstrably False-to-Reality.

When one constructs a economic action or policy based on False-to-Reality axioms the economic action or policy MUST be False-to-Reality. Therefore, it MUST follow implementing a False-to-Reality action or policy cannot solve the True-to-Reality problem(s) being addressed.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

Seems to me the bankers maximised their bonuses and the banks maximised their profits through massive over-leveraging secure in the knowledge that any downside risks would

happen to somebody else, or after the next reporting period

be covered by the Irish Government because of their systemic importance and "too big to fail" characteristics within the context of the Irish economy, and

Ultimately the Eurozone/ECB would contain all risks

They haven't been disappointed in 2. and 3. and have continued to maximise their profits/minimise losses within that context.

What bothers me is why Irish taxpayers are expected not to act in the same way and simply cast the banks adrift - allowing a liquidator to sell of functional parts of the business as an ongoing concern.

It seems to me that classical economics requires their externalities - regulators, politicians, customers, employees not to act in their own self interest for the system to remain stable or to recover its equilibrium after a shock.

Shocks are assumed to not happen. When they do happen, they are Acts Of God that Nobody Could Have Foreseen, and therefore require all public-spirited individuals and institutions to stand together and rise above their own self-serving interests.

Corporations exist to make money, so they by definition have to sacrifice the possibility of being public-spirited to the higher purpose of fiduciary duty - which, remember, will ultimately maximise the economic return for everyone.

Banksters are paid insane bonuses because this reflects the market value of their 1337 skillz.

You forget their sociopathic definition of "value," namely that it is co-terminous with "price." In other words, if your neighbour is willing and able to put a higher price on your head than you are willing and able to put on it, it is "socially efficient" for him to hire an assassin to dispose of you.

The fact that your neighbour has a hundred times as much money as you do is irrelevant to this consideration. There is a market price on your life and market prices, as we have seen from our four simple axioms earlier in this volume, optimise social efficiency.

"But I have a right to live," you object. That is irrelevant to this analysis - you can be granted the right to live, but that just means that your neighbour will have to pay you to commit suicide, rather than engage in an auction over your life with an assassin. Your life still has a price, and if your neighbour is willing to pay it, it is socially efficient for him to do so. (The thought that the price one is willing and able to pay for obtaining something might be different from the price one is willing to pay to retain the same thing does not occur to marginalist analysis.)

Ah but the Irish Government has agreed to pay for "long term economic value" not just short term market prices in a distressed market, so that's all right then isn't it?

Pity it doesn't work the other way around. Has a bank ever offered you a lower than the going interest rate on the basis that you are a fine chap and an upstanding member of the community who deserves every support they can give you?

Has a bank ever offered you a lower than the going interest rate on the basis that you are a fine chap and an upstanding member of the community who deserves every support they can give you?

They regularly charge people an additional "credit spread" based on the extent to which they think people or firms are not "fine", "upstanding" or "deserving".

Why is it so difficult to insist that anything paid above market prices should be in exchange for equity? I mean, if otherwise the banks would go bust they would be taken over by the regulator and you'd own them anyway. Oh, wait...

When one constructs a economic action or policy based on False-to-Reality axioms the economic action or policy MUST be False-to-Reality. Therefore, it MUST follow implementing a False-to-Reality action or policy cannot solve the True-to-Reality problem(s) being addressed.

Replace MUST with SHOULD, to accommodate the possibility of implausible luck.

Or well concealed manipulation. After all, manipulation that prevents the exposure of a False-to-Reality policy solution IS a solution, for so long as it holds. Just ask JPM, GS, Geithner and Bernanke.

GREEN PARTY leader John Gormley has warned that his party will not continue in Government if the membership declines to approve the National Asset Management Agency (Nama), or a new programme for government, at a crucial convention in about three weeks' time.

It emerged last night that serious tension developed at the Cabinet meeting on Wednesday morning, involving the two Green Ministers and Taoiseach Brian Cowen, over the details of the speech on the Nama Bill to be delivered later in the day by Minister for Finance Brian Lenihan.

Government sources played down the row but conceded that there was "tension and intense negotiation right to the end" over the details of the figures to be announced by Mr Lenihan.

Shares in the country's two largest banks, Bank of Ireland and Allied Irish Banks (AIB), hit their highest levels this year after the Government outlined the scale of the toxic loans moving to Nama.

The two banks gained 1.16 billion in value as investors were buoyed that Nama's writedown of their bad property loans would not lead to a higher Government stake and dilute the investments of the existing shareholders.

AIB's declaration of confidence in its capacity to private raise about 2 billion in new capital without any resort to fresh State capital was greeted with considerable scepticism in Government circles.

IMO, it is not so much about "ideology", but ignorance. Neoliberals are unable to make the difference between "profits" (from production) and "rents". They seem to believe "rents" are "wealth", instead of income extracted out from wealth. Instead of seeing banks as the originator of increasing rents (housing prices) they see banks as "victims" of "human irrationality". They perhaps even see banks as "wealth creator", because cheap money causes higher "asset values", not the fools or crooks they really are.
Now the economy must pay billions of these artificial rents. When all money comes for economic surplus, this can only mean lower consumption and lower capital formation, less wealth.

What has been startling is that all the toxic debt has been property price related, none has been created by productive manufacturing or services firms going bust because they were badly run or encountered market difficulties. The real economy had nothing to do with this crash - although it is now suffering the consequences.

So now the banks tell us they need billions to get the real economy moving again. But they are systematically denying credit for productive businesses and making productive business more uncompetitive by stoking up property prices and and input factor costs (like labour - which had to go up to fund the inflated costs of house mortgages)..

What is to prevent the banks using the money gained to create another asset price boom. What evidence have we that they are actually about helping the real economy in the first place?

What evidence have we that they are actually about helping the real economy in the first place?

It's axiomatic!

The real economy had nothing to do with this crash - although it is now suffering the consequences.

That is debatable. The conditions for a credit bubble were created by political and monetary authorities and the demand for credit was there in the real economy. Had there not been a bubble there would have been a slump because the real economy cannot support the desired level of real GDP growth and hasn't been able to for maybe 35 years.

I suppose we have to be careful about using terms like the "real" economy, but as far as I am aware credit to productive businesses wasn't increasing beyond normal growth figures. All the spare cash was being pumped into land and property development.

There was a boom in private consumer credit as well as the number of jobs in the economy doubled (from 1 to 2 Million) and wages grew rapidly. Low interest rates made big houses "affordable" even at hugely inflated prices. However it was not that outrageous a growth if you factor in the "expectations" that wages would continue to rise and interest rates would remain at historically low levels within the Eurozone (relative to prior Irish rates).

So my main point - that the productive economy - had little to do with the crash - and over-leveraged banks were the main drivers - still stands, I think. It follows that all this guff about us needed a very liquid banking sector to get the economy moving again - misses the point that the banks behaviour was toxic even in the good times.
Most of Irish grown until c. 3004 was export led manufacturing - computers, software, pharma, high tech - and it was only after that that consumer expenditure became a large (and unsustainable) part of the growth.

It was the general inflationary pressure that rendered manufacturing uncompetitive, but even now exports and maufacturing continue to grow modestly in a very hostile environment. It is this growth which is threatened by the credit crunch -and which IO would argue, the banks did little to help even in the "good times".

With cheap private consumer credit there is more demand for the products of the "real economy", therefore increasing the turnover of "real" productive business and improving their creditworthiness. In fact, if real businesses are failing because of lost access to revolving credit lines or the inability to roll over loans it means they were benefitting from the climate of the credit bubble.

The businesses that are in trouble are the small suppliers, the building and hospitality industries etc. - and of course they were bloated by the boom. (Construction was 15% of GDP). However the manufacturing and international services sector is huge in Ireland, the vast bulk of their produce was and is exported, and thus relatively unaffected by increases in Irish consumer expenditure. On the contrary they were damaged by the increased costs of busines created by inflated property prices and wages required to pay those property prices.

The other factor, not discussed to date, was that the Public sector managed to have its salaries benchmarked to the top end of private sector wages (+ security of tenure, + massive guaranteed, defined benefit, and unfunded pensions). This meant that Irish civil servants and related professions like doctors, nurses, teachers et. are the best paid in the world. Medical Consultants 250K state salary for a short week plus at least that again for their private patients. Teachers paid at twice French rates.

There has been a very rapid "readjustment" in the private sector with widespread redundancies and wage cuts. However there is virtually no mechanism for a readjustment in the public sector.

Of course, as a good Keynesian, you will point to the reflationary impact of high wages and benefits etc. The problem is they are very unequally distributed and unsustainable as a whole as we move towards a 15% public sector deficit.

I have been saying for years that one of the biggest blind spots of all political economists is the failure to distinguish the fundamental difference between the nature of :

(a) Credit = "time to pay" - necessary for the circulation of money's worth and the creation of productive assets; and

(b) Credit tied up in completed productive assets, and which may be unsecured (typically public) credit, or (typically private) credit secured by a legal claim over productive assets.

Most credit = money in existence is in the latter category, and where it is created ex nihilo by credit institutions and applied to pre-existing assets results in asset price inflation, but not retail price inflation.

Retail price inflation IMHO results primarily from a combination of fiscal deficit and the profit motive, which by definition - is inflationary of retail prices.

"The future is already here -- it's just not very evenly distributed"
William Gibson

Businesses always make a radical distinguish between capital or project expenditure = once off - and ongoing revenue expenditures. Projects have to be justified based on a return on investment/payback years - sufficient to cover interest costs, risk contingencies, and generate a profit.

Banks naturally favour funding capital expenditures where there are some tangible assets they can secure the loans on. Unfortunately existing assets - (e.g. property) are a lot more tangible than projected cash flows from a productive investment, and so they favour property over productive investment.

Thus the more aggressive the banks, the more they lend against property, the more they inflate property prices, the more they create the illusion of increased wealth, which is used to borrow even more. It's hard to see how this cannot lead to a boom and bust cycle in property prices...

I would say that ideology consists of several parts: one that tells you (in broad strokes) how the world works, one that tells you what is good and what is bad outcomes, one that tells you who matters when it comes to outcomes (that tends to be "your group" however it is defined), the narrative of how your group are going to win, and probably more parts.

This diary would then be focused one the first part of the neoliberal ideology, the beliefs of how the world works. That fundamental tenets appear to be horrendously wrong can sometimes shock persons out of an ideology (and into another) but often just serves as an excuse to add an ad-hoc explanation.

THE EUROPEAN Central Bank (ECB) is indirectly funding about a quarter of the Irish Government deficit, according to Central Bank figures.

The data shows that Irish banks have availed of ECB support to purchase almost 7 billion worth of Irish Government bonds since last November, when the National Treasury Management Agency (NTMA) stepped up its borrowing programme.

Irish banks account for 26 per cent of the 26.3 billion in debt issued over the last 10 months. The banks are able to purchase the debt by borrowing from the ECB at a rate of 1 per cent to buy the Irish bonds which pay about 5 per cent per year. They have been allowed access to unlimited ECB funding lines to purchase bonds as part of the emergency liquidity measures introduced in the the wake of the crisis in world credit markets.

Under the ECB refinancing operations, the Irish banks must first purchase the Irish bonds - usually with short-term financing. Once they own the bonds, they can refinance them at the ECB, that is get cash by putting the bonds up as collateral. The final part of the process is to repay the original borrowing.

The ECB is forbidden under its own rules to lend directly to member states, as this would be equivalent to printing money to fund a government deficit. However, the current system, under which Irish banks are borrowing from it at a low rate in order to lend on to the Irish Government at a higher rate - in the form of bond purchases - is tantamount to lending directly to the Government, market sources claim.